This week I am going to talk about the top 7 most popular mistakes we can make when buying an investment property.
Peer pressure often forces otherwise logical people to make illogical decisions that are quite common in the real estate space.
Sellers, Wholesalers, and Realtors tend to paint an unrealistically rosy picture of how profitable the investment will be.
Maybe you don’t want to disappoint those who are pitching you such an amazing deal so you pull the trigger.
It might be that you are so excited about the opportunity to own real estate you skim over the deal without completing a full cashflow analysis.
Sellers of investment real estate know that you as the newbie do not want to be considered a tire kicker, so you do the deal so as not to disappoint the “cool kids”.
Shortly after closing, you find yourself short of cash over the next few months.
You find this odd because after all, you recently bought a rental property, and it’s rented so where are all those profits?
I’ll tell you where…
Most common cashflow killers that are overlooked or underestimated:
Sellers would have you believe there is no such thing, yet it’s your biggest cash flow killer. Never underestimate this, in fact, insist the seller show a lengthy track record of stable income if they are unable to prove it, assume the worst. Find more than one experienced property managers and ask them what is reasonable to expect in vacancy loss
Property Management Fees:
The amount varies by market area, size of the asset, and the manager’s expectations. Don’t EVER ignore this expense in favor of self-management…that’s a cashflow killer for sure.
“But Tyler, the tenant pays the utilities”:…sure, until they move out. In many cases, the landlord is paying water, sewer, and trash, sometimes electricity is paid by the owner/landlord. In the summer, one month of electricity can cost hundreds of dollars because the AC should be kept on to prevent mold build up in humid areas. The same situation applies in the winter in cold climates, many times the heat (gas or electric) needs to be used to keep pipes from freezing.
It is simply not possible to guess what the cost of insurance will be.
Just because your house is a similar size to the one you are thinking about buying does not mean that the insurance costs will be similar amounts. Construction type, area, building material, your credit rating, type of rental (short or long term), all impact the insurance cost.
Overestimating Rent Amounts:
Use multiple data sources to determine what fair market rent should be.
Use classified ads and calls to other landlords who own properties similar to yours, near yours, and ask what they are actually receiving in rent.
Check MLS rental data for rented properties (not vacant properties). Use Rentometer Pro to get specific to your asset type (house or apartment)
Please know that you will not be able to simply raise the rent on day one, regardless of what the seller, Realtor or wholesaler says.
Misjudging rent ready repairs:
Get quotes from licensed contractors for work needed before you get locked down. Never take the word of those who are selling you the property.
When a property is purchased, the property tax is often increased to match the purchase price you paid for it if the property was bought for more than the most recent tax value assessment. Furthermore, if the home was owner-occupied, it’s likely a homestead tax exemption is on the property now which will fall off once title or deed changes hands. Call the local tax collector and give them the intended purchase price in order to obtain the real cost of taxes once you close. Don’t be surprised if the taxes increase by thousands of dollars per year.